Anaheim Mayor Curt Pringle has often been on the other side of the League of California Cities.

Orange County Supervisor Chris Norby has been suspicious of the California Statewide Communities Development Authority since he was a Fullerton city councilman in the 1990s.

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Paul McIntosh is the executive director of the California State Association of Counties and chairman of the California Statewide Communities Development Authority. He is relatively new to both positions.

Chris McKenzie is the executive director of the League of California Cities and a board member of the Califonria Statewide Communities Development Authority.

The San Onofre Nuclear Generating Station near San Clemente received tax free bonds from the California Statewide Communities Development Authority for pollution control.

The Fantasy Springs Resort casino in Indio was a recipient of tax free bonds from the California Statewide Communities Development Authority.

The agency, the California Statewide Communities Development Authority, issued about $4.2 billion in tax free bonds in 2007, ranking behind only the states of California, Ohio and New York.

County supervisors and city council members statewide formed the agency. Last year, their political associations pocketed $4 million from it.

The Bay Area businessmen who staff it made even more.They collected $10 million.

For 20 years, they have operated out of the public view, using a public agency to help finance their special interests while siphoning off tax revenue for projects of dubious public value.

They have taken a public agency and made it a private benefit.

“This is the ultimate in invisible government,” said Orange County Supervisor Chris Norby, who’s been suspicious of the agency since he was a Fullerton City Councilman in the 1990s. “It’s kind of the worst of both worlds,” he said, “public and private.”

According to its Web site, California Communities only funds projects of “tangible public benefit,” projects that “contribute to social and economic growth and improve overall quality of life” in California. And indeed, the agency has backed numerous affordable housing and hospital projects of unquestionable public value.

But California Communities also has borrowed on behalf of private enterprises, a legal transaction that helps those businesses compete against less-connected rivals.

In Emeryville, their tax-free bonds financed a 60,000-square foot roastery that helped Peet’s Coffee and Tea expand from Northern California to the rest of the nation.

In the Coachella Valley, their bonds paid for a casino hotel at the Cabazon Band of Mission Indians’ Fantasy Springs Resort.

In Elk Grove, they financed impact fees for a BMW dealership.

In Richmond, they refinanced a Chevron refinery’s pollution controls.

In Carlsbad, they paid to expand the Gemological Institute of America, the “World’s Most Trusted Name in Diamond Grading.”

And in Orange County, their bonds bought a new athletics and fine arts center for St. Mary and All Angels School, a private institution serving less than 700 students.

The people behind California Communities defend their approach as 100 percent legal and note that local governments and state authorities must sign off on their proposals. They say the projects that benefit private companies were approved to create jobs.

“This is actually an area in which there’s always debate around the country about whether government should play a role in helping create expansion opportunities for businesses,” said Chris McKenzie, vice chairman of the California Communities board and executive director of the League of California Cities.

“Congress and the state have not established any kind of threshold. They haven’t even said you have to create one new job. What they’ve said is the issuer has to be convinced that this is necessary in order to preserve this economic activity.”

And California Communities officials say they carefully study each project to ensure it creates a public benefit worthy of tax-free status.

“Expanding jobs,” McKenzie said, “expanding the flow of capital into California from outside of California, creates, most people would say, a public benefit.”

Their bonds may have also lowered your energy bill. California Communities financed pollution control equipment at San Onofre Nuclear Generating Station near San Clemente.

“The ability to issue tax free bonds … lowers the annual cost to our customers on an ongoing basis,” Gil Alexander, a Southern California Edison spokesman, said in an e-mail.

But there are consequences when the agency issues bonds: The state loses tax revenue.

Exactly how much is difficult to calculate because of the many variables.

Assuming that only Californians of average income purchased California Communities bonds and that interest rates ranged from 3 to 6 percent, the Orange County Register calculated that the state loses $24 million to $49 million a year in taxes on the agency’s outstanding debt.

But that number is very rough. Bond buyers tend to be wealthy people in high tax brackets, which would increase the amount of lost tax revenue. And as California Communities itself notes, it’s very difficult to estimate the average interest rate on its debt with more than 650 bond offerings in the market.

No elected officials

According to the Thomson Reuters financial reporting service, California Communities was the nation’s fifth largest debt issuer in 2007. But the agency claims to have no revenue, expenses, liabilities or assets. In fact, California Communities doesn’t even draft an annual budget.

Instead, California Communities claims that the millions it generates is the property of three contractors – the League of California Cities, the California State Association of Counties (CSAC) and a business called HB Capital Resources.

The League and CSAC are two of the best-known special interest groups in Sacramento. They represent the political interests of every county and hundreds of cities in California. Each year, they are paid a portion of the agency’s fees to develop programs and “promote” California Communities to its members. In 2007, each group took home more than $2 million.

Both associations say they use the California Communities proceeds to keep their membership fees low.

“If we didn’t have that revenue stream, we would raise dues,” McKenzie said. “Who pays that? The taxpayers.”

The associations, however, are more that just contractors. The cities and counties that created California Communities have given them power to appoint members to the agency board. These two private organizations literally control a public agency.

And who have they appointed to the board? Why, their own executives: McKenzie; Paul McIntosh, CSAC’s executive director; Tom Sweet, executive director of the CSAC Finance Corporation; Dan Harrison, the League’s director of administrative services; and Jean Hurst, CSAC legislative representative.

Not a single elected official sits on the California Communities board.

League and CSAC officials note that elected officials control their organizations and have the power to remove anyone from the California Communities board. That said, they couldn’t provide evidence that anyone had ever been removed.

What’s more, the League and CSAC have, in at least five cases, received thousands of dollars from businesses and other entities that received tax exempt financing through California Communities.

Just one example: Waste Management, a national waste hauler that was issued tax exempt bonds in 2001 to buy garbage trucks for Orange, Riverside and San Diego counties, gave $15,000 to become a “League Partner” in 2007 and contributed at least another $20,000 to a League political committee from 2005 through 2007.

“That raises questions,” said Bob Stern co-author of the Political Reform Act of 1974 and president of the nonpartisan Center for Governmental Studies. “They should not be receiving money from people benefiting from” California Communities, he said.

League and CSAC officials say they weren’t even aware that they had received money from beneficiaries of California Communities.

“We segregate the functions,” McKenzie said. “The whole fundraising function and the partnering function, I don’t get involved in. It’s totally separate from what I do with CSCDA.”

‘We get paid well’

Staffing is also a separate function, provided by the private firm HB Capital Resources, which received the largest profits from California Communities.

A company of about 30 people, HB Capitalis named for its two principals, Stephen Hamill and Jerry Burke, who operate several enterprises from an office in Walnut Creek. With names like “U.S. Communities” and “Canadian Communities,” these firms offer “public benefit” services to government and private groups.

Hamill declined to say how much of the $10 million collected from California Communities was profit, acknowledging only that “We get paid well.” He noted, however, that HB Capital operates without profit guarantees and estimated that more than 50 percent of staff time is spent on projects that never appear before the board.

Despite being a private company, Hamill said, HB Capital is devoted to serving the public. He noted that both he and Burke have a background in local government.

“It’s easy to say profit or money is evil and ignore the public benefit that’s offered,” he said. “We don’t want to be making money unless there’s a benefit we provide.”

But not everyone is convinced this arrangement is proper. The State Treasurer’s office has been examining the agency and believes it’s a conflict of interest for HB Capital to be paid a portion of bond fees when part of its job is to recommend how many bonds to approve.

The Treasurer’s office also contends that California Communities intentionally schedules its meetings to avoid public scrutiny and generally operates more like a private business than a government agency.

In a recent court case, Hamill stated, “Many of CSCDA’s business practices, procedures, and marketing strategies are confidential and are not available on the Internet or anywhere else in the public domain.”

“The notion that the business plan of a public entity is, in any way, secret, confidential [or]hidden from the public runs counter to every notion of open government and accountability to taxpayers,” said Tom Dresslar, spokesman for State Treasurer Bill Lockyer.

“It’s a bad way to do the public’s business.”

Public funds shifted to political action committee

Despite the potential conflicts of interest, California Communities has operated without much scrutiny since it was founded in 1988. But that might soon change, thanks to the upcoming election.

On June 3, the League and CSAC have a measure on the ballot called Proposition 99, which seeks to reform government’s power to seize private property. Supporters of a rival eminent domain measure, Proposition 98, have complained to the state Fair Political Practices Commission that the associations use public money to fund their ballot campaigns, which would be illegal under state law.

The associations vehemently deny it, and further claim that no money from California Communities has made its way into their political campaigns.

Internal documents from the League, however, suggest that money from California Communities may have flowed into a political campaign in 2006.

The League’s 2008 budget includes an accounting of where money went in 2006. That year, the League opposed Proposition 90, another initiative to reform eminent domain.

The budget shows that in 2006 more than $3.6 million was moved from an account where California Communities money was held and put into a League political action committee. That same year, campaign finance records show that the same League PAC contributed more than $3.5 million to the No on Prop. 90 campaign.

“This is what I think the state should look at,” said Orange County Supervisor John Moorlach, “It would be nice to get some explanations.”

Anaheim Mayor Curt Pringle, a political opponent of the League, was upset to learn that revenue from a bond measure he approved may have benefited his political adversary. In 2006, the Tiger Woods Learning Center, a nonprofit for children in Anaheim, secured more than $10 million in financing through California Communities.

“If you’re legitimately trying to assist a nonprofit entity in your community … and somehow a third party is raking off commission to run a political campaign,” Pringle said, “that’s outrageous.”

League officials say they’ve done nothing wrong. They explained that the California Communities money was co-mingled with money from other sources and it was the other sources that funded the political campaign.

Although League documents obtained by the Orange County Register don’t show it, McKenzie said his organization tracks internally the source of the revenue. He initially offered to provide records showing how the funds were kept, but later said he couldn’t because of the pending investigation by the Fair Political Practices Commission.

“We are so very careful,” McKenzie said. “We really, really are working very hard. And we’re very confident, by the way, that we’re respecting the limits of the law.”

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